THROUGH 60 RELATE TO GLOBAL INVESTMENT PERFORMANCE STANDA...
Questions 55 through 60 relate to Global Investment Performance Standards.
Patrick Campbell Case Scenario
Patrick Campbell has just been hired as a consultant by Walter Investment Firm (WIF),
an asset management firm in operation since seven years. In order to gain a competitive
advantage in its industry, in March, 2010, the firm came into compliance with the Global
Investment Performance Standards (GIPS). WIF believes that being GIPS compliant will
increase their clients’ confidence in their investment performance results and will provide
them with an increased ability to compete in foreign markets. The CEO at WIF,
Christopher Carter, hired Campbell to analyze their investment reporting and calculation
methodologies, and to identify any errors that would prevent their compliance with the
GIPS. As part of his evaluation process, Campbell talked to Carter to gather some
information. Carter shared the following information:
•
WIF values portfolios on the date of all large external cash flows, and uses an
internally determined criterion to define ‘large’. Although this criterion requires
judgment and hence, is not documented, it is applied consistently from one period to
the next. WIF values composites every year using calendar year-end valuation dates.
The composite returns are calculated by asset-weighting the individual portfolio
returns.
•
The Growth Equity Composite includes two portfolios that have an objective of
earning a 2% excess return relative to a growth equity index fund including domestic
U.S. stocks. Both portfolios are managed using a semi-active management approach.
Exhibits 1 and 2 display information about the two portfolios.
Exhibit 1
Portfolio A
Date
Market Value ($)
Cash Flow ($)
Market Value After
Cash Flow ($)
05/31/09
495,000
06/13/09
550,000
135,000
06/22/09
715,000
06/30/09
867,000
Exhibit 2
Portfolio B
05/31/09
730,400
06/13/09
789,304
06/22/09
883,000
$65,000
06/30/09
1,450,394
•
The firm’s Market Oriented Composite invests in stocks that have P/BV and P/E
ratios equal to those of an average stock in the market. The composite includes a
number of portfolios, including both fee-paying and non-fee paying discretionary
portfolios. Some of the portfolios included in the composite are also part of other
composites offered by the firm. WIF makes no disclosure related to the non-fee
paying portfolios but they are subject to the same rules as fee-paying portfolios.
•
WIF also offers real estate and private equity investment vehicles to its clients. WIF
has invested a pension fund in direct real estate, and values this investment at market
value at least quarterly. In addition, when a presentation about the investment’s
returns is made to the board of the pension fund, WIF discloses the income and
capital appreciation component returns in addition to the total return, for the portfolio
investment, but not for the benchmark.
•
WIF’s maintains a real estate closed-end fund composite which commenced on 30
December 2009 with its first legally binding and closed capital call of $2,500,000. An
additional capital call was made on June 30, 2010 (Quarter 2) followed by two cash
distributions to the composite’s investors. The investors will receive ownership of the
portfolio’s assets at the end of the two years (31 December 2011). Exhibit 3 displays
some transactions that took place in the portfolio during the two years.
Exhibit 3
WIF’s Closed-End Fund Composite Transactions
Quarter
Additional investment
2
-$1,000,000
Cash distribution
4
$650,000
7
$490,000
Ending value
8
$4,200,000
In the real estate composite’s prospectus WIF has presented the composite’s since
inception internal rate of return (SI-IRR) calculated in accordance with the GIPS
provisions. The SI-IRR of the composite’s benchmark is quoted to investors on request.
The vintage year of the fund has been identified as 2009 in the fund’s prospectus.
55. Are Walter Investment Firm’s calculation methodologies most likely in
accordance with the Global Investment Performance Standards?
A.
Only with respect to composites.
B.
Both with respect to portfolios and composites.
C.
Neither with respect to portfolios nor with respect to composites.
56. The Growth Equity Composite return for the month of June based on the
beginning assets plus weighted cash flows method using the modified Dietz
method is closest to:
A.
45.39%.
B.
67.61%.
C.
53.20%.
57. With respect to the Market Oriented Composite, is WIF most likely in accordance
with GIPS?
A.
Yes.
B.
No, because GIPS do not permit firms to include a portfolio in more than
one composite.
C.
No, because the treatment of non-fee paying portfolios is not GIPS
compliant.
58. Is the treatment of the pension fund’s investment in direct real estate most likely
GIPS compliant?
B.
No, because real estate investments must be valued at market value at least
once every month.
C.
No, because the income and capital appreciation components must also be
disclosed for the benchmark.
59. Using Exhibit 3, the SI-IRR for the WIF real estate composite over the
measurement period, which is in accordance with the GIPS standards, is closest
to:
A.
6.4%.
B.
13.4%.
C.
28.1%.
60. Is WIF in compliance with the GIPS standards with respect to the details included
in the fund’s prospectus?
B.
Only with respect to the vintage year.
C.
Only with respect to presenting the composite’s SI-IRR.